Open-Source Providers Defeat Antitrust Claim

A lot of powerful companies would like to stop the infectious spread of open-source software. Microsoft has attacked the General Public License (GPL), which allows people to freely download, modify and redistribute open-source software, since 2001; SCO continues to pursue multi-billion dollar claims against IBM, Red Hat and Novell for...

By Staff Writer|January 01, 2007 at 12:00 AM

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A lot of powerful companies would like to stop the infectious spread of open-source software. Microsoft has attacked the General Public License (GPL), which allows people to freely download, modify and redistribute open-source software; SCO Group is pursuing multi-billion dollar claims against IBM, Red Hat and Novell Inc. for their contributions to open source; and patent holders large and small have sued open-source users for infringement.

But it was Daniel Wallace, a 61-year-old retiree from Indiana, who almost did what those powerful companies have yet to do–pose a legal threat that could actually bring the burgeoning open-source movement to a halt.

Representing himself in a lawsuit filed in an Indiana district court, Wallace put forth a novel legal theory that IBM, Red Hat and Novell had violated antitrust laws by collaborating to market and distribute open-source software for free.

“If these companies combine all of their resources to target certain markets [with a free product], it removes any entrepreneur from competing in that market,” Wallace says. “I view it as a conspiracy.”

Fortunately for those who distribute and rely on the Linux operating system and other open-source software, Chief Judge Frank Easterbrook of the 7th Circuit ultimately rejected that argument in his Nov. 9 decision in Daniel Wallace v. IBM, Red Hat and Novell.

“It is certainly a significant decision,” says Robert Hayes, chair of the antitrust practice at Cozen O’Connor in Philadelphia. “If the court had found that use of open-source operating systems created antitrust concerns, it may have sounded the death knell of the open-

source movement.”

Unbeatable Price

Wallace’s unusual saga began in 2005, when he had the idea to develop and sell a new computer operating system that would compete with the open-source Linux system, which IBM offers on some of its servers. However, Wallace realized it would be impossible for him, or any small entrepreneur, to do so because IBM, Red Hat and Novell were giving away the Linux system for an unbeatable price–free. That, he said, was tantamount to price fixing that stifled competition and violated the Sherman Act.

Naturally, his opponents disagreed with that characterization. Curtis W. McCauley, a partner with Indianapolis-based Ice Miller who represented Red Hat and Novell in the case, used a two-pronged strategy to ward off Wallace’s claims. The first prong was to defeat the notion that the defendants’ actions were anticompetitive.

“Primarily, we argued that the antitrust laws are designed to protect competition, not individual competitors,” McCauley says. “Wallace wanted to compete with IBM, Red Hat and Novell. He said he couldn’t compete because Linux was available and licensed at no charge. Wallace was complaining about too much competition, not too little, which is usually what an antitrust case is about.”

The second step was to dispel the notion that the defendants had engaged in “predatory pricing,” in which a company undercuts its competitors to kill competition and then hikes prices to recoup its losses once its competitors are out of the market.

“We took the position that, one, we’re not pricing below our ultimate marginal cost and, two, we had no chance for recoupment by subsequent price hikes,” McCauley says. “Once you let the software out there under the GPL, the cat’s out of the bag; anybody else who has it is free to make as many copies as he or she wants. So there isn’t any hope for recoupment.”

Ultimately, those arguments swayed the court. Easterbrook pointed out that the antitrust laws are in place to protect competition generally, not to protect individual competitors. Therefore, Wallace could not win his case unless he could show that Linux hurt the market in general, even if it had hurt him.

“[T]he goal of antitrust law is to use rivalry to keep prices low for consumers’ benefit,” Easterbrook wrote. “Wallace does not contend that software available for free under the GPL will lead to monopoly prices in the future. How could it, when the GPL keeps prices low forever and precludes the reduction of output that is essential to monopoly? ?? 1/2 Employing antitrust law to drive prices up would turn the Sherman Act on

its head.”

Future Guidance

That ruling is good news for the many businesses that use and rely on open-source software and for technological innovation in general.

“Under the GPL, a party may not charge for the use of any derivative works,” Hayes notes. “This allows developers throughout the world to contribute to the development and improvement of the operating system. This concept has been credited with technological

advancement.”

The decision also provides guidance for companies that give away software to spur innovation to defend antitrust claims in future cases. Easterbrook’s reasoning sets out that if a company can show it’s not distributing software below cost, it has no way of recouping profits after distributing the free product, and the free product has not reduced output on the market, then it will not be found liable for predatory pricing.

“It’s a helpful ruling for those who might face predatory pricing allegations when they are giving away software or Web-based downloads that are helping them establish their presence in a market,” says Salil Mehra, an associate professor at the Temple University James E. Beasley School of Law in Philadelphia. “Easterbrook created a kind of road map for a defendant who might consider giving away a software package or download for other product he’s selling.”

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